Crown Holdings, Inc. 2016 Form 10-K Summary
Business context and reporting period
Crown Holdings designs, manufactures and sells metal and glass packaging, including beverage and food cans, aerosol containers, closures, specialty packaging and canmaking equipment. The fiscal year ended December 31, 2016. The Company operated 146 plants in 36 countries with approximately 24,000 employees; 77% of 2016 net sales came from outside the United States.
Key reportable segments were Americas Beverage, North America Food, European Beverage, European Food and Asia Pacific. Beverage cans and ends represented 58% of sales, and food cans and ends represented 27%.
Financial performance and metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $8,284 million | $8,762 million | Down 5.5% |
| Income from operations | $1,021 million | $927 million | Up 10.1% |
| Operating margin | 12.3% | 10.6% | Up 170 basis points |
| Net income attributable to Crown | $496 million | $393 million | Up 26.2% |
| Diluted EPS | $3.56 | $2.82 | Up 26.2% |
| Cash flow from operations | $930 million | $956 million | Down $26 million |
| Capital expenditures | $473 million | $354 million | Up $119 million |
| Cash and equivalents | $559 million | $717 million | Down $158 million |
| Total debt | $4,911 million | $5,518 million | Down $607 million |
| Total equity | $668 million | $385 million | Up $283 million |
Gross profit, as defined by the Company, was approximately $1,454 million, or 17.5% of sales. Cost of products sold excluding depreciation and amortization declined to 79% of sales from 81% in 2015. The effective tax rate was 24.1%, compared with 27.9% in 2015, including a $31 million benefit from releasing a Canadian deferred-tax valuation allowance.
Liquidity included $1,158 million of available revolving-credit capacity and $76 million of available securitization capacity at year-end. Net debt to total capitalization was 86.7%, compared with 92.6% in 2015. The Company was in compliance with its debt covenants, reporting interest coverage of 5.30 times versus a 2.85 times minimum and total net leverage of 3.26 times versus a 4.50 times maximum.
Material changes versus the prior comparable period
- Sales declined primarily because of foreign-currency translation and lower raw-material pass-through pricing. At constant 2015 exchange rates, 2016 sales would have been $277 million higher.
- Americas Beverage segment income increased to $456 million from $427 million, supported by a 6% increase in sales unit volume, Empaque contributions, cost performance and lower Brazilian aluminum premiums.
- North America Food segment income declined to $69 million from $86 million because of lower volumes. European Beverage segment income rose to $243 million from $228 million, while European Food segment income declined slightly to $244 million from $246 million.
- Asia Pacific segment income increased to $152 million from $145 million despite lower pricing and currency effects. Non-reportable segment sales declined to $484 million from $621 million, partly reflecting divestitures and lower equipment sales.
- Income from operations improved despite lower sales because of lower raw-material costs, foreign-currency effects on expenses, reduced selling and administrative costs, lower asbestos and restructuring charges, and improved segment performance.
- Debt declined following refinancing and repayment activity. The Company redeemed $700 million of 6.25% senior notes due 2021 and issued new euro- and U.S.-dollar-denominated notes in 2016, recording $37 million of early-extinguishment losses.
- Cash used in investing activities fell to $442 million from $1,548 million because 2015 included the $1.2 billion Empaque acquisition. Financing activities used $616 million in 2016, versus providing $406 million in 2015.
Guidance, outlook, commentary and risks
- Management expects 2017 capital expenditures of approximately $450 million and expects to use the majority of 2017 free cash flow to repurchase common stock. In December 2016, the Board authorized up to $1 billion of repurchases through the end of 2019, subject to debt covenants and market conditions.
- The Company is pursuing beverage-can growth in emerging markets and capacity expansions in Colombia, Vietnam, Indonesia and Myanmar, as well as a glass-bottle facility in Mexico. The filing does not provide formal 2017 revenue or earnings guidance.
- Expected 2017 asbestos-related cash payments are approximately $30 million. The asbestos accrual was $342 million at year-end, including $300 million for unasserted claims; actual losses could exceed the accrual and the excess cannot be reasonably estimated.
- Pension contributions are projected at $60 million in 2017, with additional projected contributions of $61 million in 2018 and 2019, $86 million in 2020 and $99 million in 2021.
- The German Federal Cartel Office investigation into suspected anticompetitive conduct remains ongoing. Management believes a loss is probable but cannot estimate the amount or range of any additional loss; the potential impact could be material.
- Principal risks include substantial leverage and refinancing requirements, foreign-exchange exposure, raw-material and energy-price volatility, industry overcapacity, customer concentration, seasonal demand, international political and economic conditions, environmental and product-regulation changes, pension obligations, asbestos litigation, cyber and information-technology disruption, and litigation or regulatory penalties.
- The Company had approximately $4.9 billion of indebtedness, including approximately $1.1 billion subject to floating rates. A 1% increase in variable interest rates would increase annual interest expense by approximately $11 million based on year-end debt.
- Goodwill was $2,791 million at year-end. No impairment was recorded in 2016, but the European Aerosols and Specialty Packaging and North America Food reporting units had relatively limited valuation cushions.
Most important facts for an investor to verify
- Whether planned beverage-can capacity expansions generate sufficient volume and returns without worsening overcapacity or leverage.
- The pace of debt reduction, refinancing of maturities beginning in 2017 and 2018, and compliance with leverage and interest-coverage covenants.
- Actual 2017 free cash flow after capital expenditures, pension contributions, asbestos payments and working-capital needs.
- Developments and eventual penalties or settlements from the German cartel investigation.
- Whether asbestos claims, settlement costs and claim severity remain consistent with the $342 million accrual.
- The sustainability of the lower 2016 effective tax rate, including the effect of valuation allowances, foreign tax credits and potential tax-law changes.
- Foreign-currency effects, particularly the euro, and the Company’s ability to pass steel, aluminum, energy and freight costs through to customers.
- Exposure to goodwill impairment, pension funding requirements and environmental or other contingent liabilities.